Suppose that a person regards ham, h and cheese, c, as pure complements. He will always use one slice of ham in combination with one slice of cheese to make a ham and cheese sandwich. Suppose also that ham and cheese are the only goods that this person eats, and he has an income of I. (a)Draw the indifference curves associated with this utility/demand function. Show on the graph what happens after an increase in the price of cheese? (b)Find, analytically, the change in demand of both goods associated with a (marginal) increase in the price of cheese. (c)Decompose this change into a substitution effect and an income effect. What is the intuition behind this result?
Suppose that a person regards ham, h and cheese, c, as pure
complements. He will always use one slice of ham in combination with one slice of cheese to make a ham and cheese sandwich. Suppose also that ham and cheese are the only goods that this person eats, and he has an income of I.
(a)Draw the indifference
(b)Find, analytically, the change in demand of both goods associated with a (marginal) increase in the price of cheese.
(c)Decompose this change into a substitution effect and an income effect. What is the intuition behind this result?
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